Credit spreads in IG debt market reach historically tight levels

Credit spreads in the investment grade debt market reached historically tight levels in the fourth quarter of last year.

A new analysis of Bank of America data by Ninety One found that spreads continued to tighten towards the end of 2024. The investment manager suggested that the tight credit spreads mean that valuations are historically expensive, and investors are receiving limited compensation for credit risk.

For the year as a whole, the US investment-grade market returned an “uninspiring” 2.8 per cent, despite credit spreads tightening by an impressive 22bps, noted Darpan Harar, multi asset credit portfolio manager at Ninety One.

However, Harar added that the fact that US investment-grade all-in yields are again comfortably above five per cent is likely to lure buyers back into the asset class in 2025.

“While credit spreads in traditional markets, such as US high yield and investment-grade, remain near the tightest levels seen over previous cycles, we see good value in more specialist areas of the market and more defensive sectors,” said Harar.

While investment grade products underperformed last year, the data showed that floating-rate assets, including collateralised loan obligations (CLOs) and leveraged loans, outperformed.

“A stronger spread rally across US CLOs helped all rating categories outperform their European peers in the fourth quarter,” said Harar.

“Growing demand across a range of investor categories and the expansion of the middle-market CLO segment in the US has contributed to the growth of the CLO market, with volumes surpassing previous records set in 2021.”